Actual Monthly Change in August Payrolls Likely Was a Contraction – Though Bloated by Seasonal-Factor Distortions and Add-Factors, Annual Payroll Growth Effectively Held at a 30-Month Low – Second-Quarter Real Merchandise Trade Deficit Remained Worst Since 2007. – John Williams, Shadowstats.com
The negative economic news continues to spill out, with most economic reports reflecting an economy that is already in contraction (recession). The most interesting report out last week was auto sales for July, which showed a 5.5% drop from June overall and a 6.2% drop for domestic vehicles. These comps are based on seasonally “adjusted” annualized rates. I would bet anything that the actual number of cars sold in July vs. June were a lot lower. Ford reported an 8.4% drop in sales. Ford admitted that the market was soft and that retail price incentives are at historical highs. In short, the overall auto sales report was a disaster and it’s going to get worse going forward.
With regard to the transports index, a report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out last week that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.
One last datapoint that you might not have seen because it was not reported in the mainstream financial media, or even Zerohedge: the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the the 5th month in a row in July. The rise was attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.
The housing market is going to crash again. Vancouver home sales crashed 23% in one month – LINK. Think this can’t happen in the U.S.? Think again because, as I detailed in a previous post, home sales in Aspen and the Hamptons have crashed 50% this summer. In this post – LINK – I presented data from Redfin which showed home sales in July fell 46% in Vegas, 24% in Miami, 21% in Portland, 20% in Oakland and 11% in Denver.
The entities that report housing and auto sales can hide the truth about monthly sales volume using seasonally adjusted annualized rate metrics, but they can’t simulate actual economic activity with fake data. Eventually reality catches up. Go drive around areas where you live that use to be “hot” housing markets. I bet you’ll see a lot of “for sale,” “for rent” and “price reduced” signs. I am seeing that all over Denver and I’m starting to see it in the formerly “hot” suburban areas.
I have no problem betting on housing with my own capital. My homebuilder short positions are the highest they’ve been since 2008. Unless the Government starts pushing 0% down payment mortgages in general, vs. through programs sponsored by the USDA and VHA, the housing market is hitting a stiff wall in Q4.
The stock market is going to have to break one way or another. Below is 60-minute, intra-day chart of the S&P 500 that I have been posting in my weekly Short Seller’s Journal (click to enlarge):
I just don’t think the S&P 500 can continue in this “holding” pattern much longer. Some think the Fed is holding up the market until after the election. I don’t know if that’s true or even possible. It’s my view that, unless the Fed engages in another massive round of money printing, at some point it’s going to lose its ability to keep the market from turning south violently. By the way, because of what you see in the graphic above, puts on most stocks, especially homebuilder stocks, are very cheap right now. Buy cheap and sell dear.
Even though the Fed is obviously propping up the S&P 500 and Dow, several sub-sectors of the market are heading lower. Housing, retail, transports and financials are just a few. Interestingly, the last four short ideas presented in my Short Seller’s Journal have worked right out of the gate. This type of winning streak has not occurred since late December. Regardless of whether my ideas work immediately or take a few months to develop, most of them will work better than shorting the SPX over the next several months/years. You can access the Short Seller’s Journal this link: SSJ Subscription.